<PAGE>
[PHOTO]
[PHOTO]
[PHOTO]
[PHOTO]
MINNESOTA MUNICIPAL
INCOME PORTFOLIO
* * *
SEMIANNUAL REPORT
1995
<PAGE>
TABLE OF CONTENTS
AVERAGE ANNUALIZED TOTAL RETURNS....1
LETTER TO SHAREHOLDERS..............2
TAX REFORM PROPOSALS................9
FINANCIAL STATEMENTS AND NOTES.....10
INVESTMENTS IN SECURITIES..........19
SHAREHOLDER UPDATE.................23
MINNESOTA MUNICIPAL INCOME PORTFOLIO
Minnesota Municipal Income Portfolio is a non-diversified, closed-end investment
company. The fund's investment objective is to provide high current income
exempt from both regular federal income tax and state of Minnesota personal
income tax, consistent with preservation of capital. To realize this objective,
the fund invests in a wide range of Minnesota municipal securities rated
investment grade or of comparable quality when purchased. These securities may
include municipal derivatives, which may be more volatile than traditional
municipal securities in certain market conditions. As with other mutual funds,
there can be no assurance this fund will achieve its investment objective. Since
its inception on June 25, 1993, the fund has been rated Af by Standard & Poor's
Corporation (S&P).* Fund shares trade on the American Stock Exchange and the
Chicago Stock Exchange under the symbol MXA.
*THE FUND IS RATED Af, WHICH MEANS INVESTMENTS IN THIS FUND HAVE AN OVERALL
CREDIT QUALITY OF A. CREDIT QUALITIES ARE ASSESSED BY STANDARD & POOR'S MUTUAL
FUNDS RATING GROUP. S&P DOES NOT EVALUATE THE MARKET RISK OF AN INVESTMENT WHEN
ASSIGNING A CREDIT RATING. SEE STANDARD & POOR'S CORPORATE AND MUNICIPAL RATING
DEFINITIONS FOR AN EXPLANATION OF A.
THE FUND ALSO HAS BEEN GIVEN A MARKET RISK RATING BY S&P, WHICH WE CANNOT
PUBLISH DUE TO NASD REGULATIONS. RISK RATINGS EVALUATE VARIOUS INVESTMENT RISKS
THAT CAN AFFECT THE PERFORMANCE OF A BOND FUND AND INDICATE THE FUND'S OVERALL
STABILITY AND SENSITIVITY TO CHANGING MARKET CONDITIONS. THESE RATINGS ARE
AVAILABLE BY CALLING S&P AT 1-800-424-FUND.
<PAGE>
AVERAGE ANNUALIZED TOTAL RETURNS
AVERAGE ANNUALIZED TOTAL RETURNS FOR THE PERIODS ENDED JULY 31, 1995
[GRAPH]
Average annualized total return figures are through July 31, 1995, and are based
on the change in net asset value (NAV) and reflect the reinvestment of
distributions but do not reflect sales charges. NAV-based performance is used to
measure investment management results.
Average annualized total return figures based on the change in market price
for the one-year and since inception periods ended July 31, 1995, were 0.99%
and -3.99%. These figures also assume reinvested distributions and do not
reflect sales charges.
The Lipper General Municipal Bond Funds: Leveraged Average represents the
average total return, with distributions reinvested, of 64 perpetual and term
trust national closed-end municipal bond funds with preferred stock
outstanding, as characterized by Lipper Analytical Services. This average
does not include any Minnesota funds; however, we chose not to compare the
returns of Minnesota Municipal Income Portfolio to the Lipper Closed-End
Minnesota Municipal Bond Funds Average due to the small number of funds (six)
included in that average. The total return for this average was 9.21% for the
one-year period ended July 31, 1995.
PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. THE INVESTMENT RETURN AND
PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT FUND SHARES, WHEN SOLD,
MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
1
<PAGE>
MINNESOTA MUNICIPAL INCOME PORTFOLIO
September 15, 1995
Dear Shareholders:
WE ARE PLEASED WITH THE NET ASSET VALUE PERFORMANCE OF MINNESOTA MUNICIPAL
INCOME PORTFOLIO FOR THE SIX MONTHS ENDED JULY 31, 1995. During this six-month
period, the fund had a net asset value total return of 13.25%,* which assumes
the reinvestment of distributions and does not include sales charges. This
compares to the Lipper General Municipal Bond Funds: Leveraged Average return of
8.60% for the same period. This performance is primarily a result of the fund's
long effective duration due in part to its holdings of inverse floating rate
municipal securities which are explained below. The fund's six-month total
return based on market price was 5.57%.* It has maintained a common stock
distribution yield of 5.55% for the same period.** As of the end of July, the
fund had a net asset value of $13.12.* The chart on page 4 shows the history of
the fund's net asset value since inception.
<TABLE>
<CAPTION>
DISTRIBUTION HISTORY
(ON A COMMON SHARE BASIS)
DISTRIBUTIONS PAID IN THE FUND SINCE ITS INCEPTION
ON JUNE 25, 1993, THROUGH JULY 31, 1995
<S> <C>
Total Monthly Income Dividends Paid
to Common Shareholders...................$1.67
Capital Gains Distributions
Paid to Common Shareholders..............$0.00
-----
TOTAL DISTRIBUTIONS PER SHARE
PAID TO COMMON SHAREHOLDERS..............$1.67
Total Monthly Income Dividends Paid
to Preferred Shareholders................$0.45
Capital Gains Distributions
Paid to Preferred Shareholders...........$0.00
-----
TOTAL DISTRIBUTIONS PER SHARE
PAID TO PREFERRED SHAREHOLDERS...........$0.45
</TABLE>
WE CONTINUE TO BELIEVE THE MUNICIPAL BOND MARKET REPRESENTS AN ATTRACTIVE
OPPORTUNITY FOR LONG-TERM INVESTORS. Since early 1995, the municipal bond market
has lagged the Treasury bond market due to ongoing concerns about proposed tax
reforms (see page 9 for more information), the crisis in Orange County,
* THESE TOTAL RETURN AND YIELD FIGURES REPRESENT PAST PERFORMANCE AND WILL
FLUCTUATE. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. THE RETURN AND
PRINCIPAL VALUE OF YOUR INVESTMENT WILL FLUCTUATE SO THAT FUND SHARES, WHEN
SOLD, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
** THIS FIGURE REPRESENTS THE ANNUALIZED YIELD FOR THE SIX MONTHS ENDED JULY 31,
1995, BASED ON THE INITIAL OFFERING PRICE OF $15 PER SHARE. ACTUAL YIELDS MAY
DIFFER DEPENDING ON AN INDIVIDUAL SHAREHOLDER'S COST BASIS.
2
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MINNESOTA MUNICIPAL INCOME PORTFOLIO
California, and competition from a robust stock market. These concerns have
resulted in lower municipal bond prices, making them a relatively good value --
especially considering the declining supply of new issues. The supply of new
issue municipal bonds in Minnesota decreased by 60% in 1994 compared to 1993 and
another 8% in the first half of 1995 compared to the first six months of 1994.
[FPO PHOTO]
Doug White, CFA, (above)
SHARES RESPONSIBILITY FOR THE MANAGEMENT OF MINNESOTA MUNICIPAL INCOME
PORTFOLIO. HE HAS 12 YEARS OF FINANCIAL EXPERIENCE.
[FPO PHOTO]
Ron Reuss, (below)
SHARES RESPONSIBILITY FOR THE MANAGEMENT OF MINNESOTA MUNICIPAL INCOME
PORTFOLIO. HE HAS 26 YEARS OF FINANCIAL EXPERIENCE.
DURING THE PAST SIX MONTHS, THE FUND'S RELATIVELY LONG EFFECTIVE DURATION HAS
PROVED BENEFICIAL AS INTEREST RATES HAVE FALLEN. Typically, fixed income
portfolios with long effective durations tend to outperform comparable funds
with relatively shorter effective durations in bull bond markets (i.e., when
interest rates are falling and bond prices are rising), and tend to underperform
in bear bond markets, such as 1994. Because the fund is managed as a long-term
investment, we believe that a longer effective duration will likely, over time,
benefit shareholders by providing higher tax-free income. Over the short term,
however, this will result in greater net asset value volatility. The past 24
months illustrate the short-term volatility that results from this strategy.
During the 12 months ended July 31, 1994, which was mainly a period of rapidly
rising interest rates, the fund's net asset value total return was -3.74%. Its
net asset value per share fell from $14.12 to $12.73. During the 12 months ended
July 31, 1995, the fund's net asset value total return was
3
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MINNESOTA MUNICIPAL INCOME PORTFOLIO
10.29% and its net asset value per share rose to $13.12. This was a period of
volatile interest rate movements, which ended in a significant decline.
THE PORTFOLIO HAS BEEN INVESTED IN A SMALL POSITION OF INVERSE FLOATING RATE AND
INVERSE INTEREST-ONLY MUNICIPAL SECURITIES IN ORDER TO ASSIST THE FUND IN
ACHIEVING ITS OBJECTIVE OF EARNING HIGH CURRENT INCOME. We invest in inverse
floating rate and inverse interest-only securities, which currently represent 5%
and 2% of the fund's total assets, respectively, to generate additional income.
These securities also increase the fund's net asset value volatility. When
long-term interest rates rise, as they did in 1994, the value of these
securities will decline to a greater extent than traditional municipal
securities. This will have a disproportionately negative impact on the fund's
net asset value. On the other hand, as interest rates have fallen in 1995, the
increased volatility of these securities has had a disproportionately positive
impact on the fund's net asset value. Although the fund's holdings of inverse
floating rate and inverse interest-only securities have earned significant
additional income for the fund to date, it's important to realize that the
interest rates earned on these securities move in the opposite direction of
short-term, tax-exempt rates. Therefore, if short-term interest rates were to
rise dramatically, there could be a significant reduction in the fund's income.
This, in turn, could increase the likelihood of a reduction in the fund's common
stock dividend.
<TABLE>
<CAPTION>
NET ASSET VALUE SUMMARY PER SHARE
<S> <C>
Initial Offering Price (6/25/93)......$15.00
Initial Offering and
Underwriting Expenses
(Common and Preferred Stock)..........-$1.01
Accumulated Realized
Losses at 7/31/95.....................-$0.79
------
Subtotal............................$13.20
Undistributed Net Investment
Income/Dividend Reserve
at 7/31/95.............................$0.06
Unrealized Depreciation
on Investments at 7/31/95.............-$0.14
------
NET ASSET VALUE ON 7/31/95............$13.12
</TABLE>
4
<PAGE>
MINNESOTA MUNICIPAL INCOME PORTFOLIO
PREFERRED STOCK
Preferred stock pays dividends at a specified rate and has preference over
common stock in the payments of dividends and the liquidation of assets. Rates
paid on preferred stock are reset every seven days and are based on short-term,
tax-exempt interest rates. Preferred shareholders accept these short-term rates
in exchange for low credit risk (shares of preferred stock are rated AAA by
Moody's and S&P) and high liquidity (shares of preferred stock trade at par and
are remarketed every seven days). The proceeds from the sale of preferred stock
are invested at intermediate- and long-term tax-exempt rates. Because these
intermediate- and long-term rates are normally higher than the short-term rates
paid on preferred stock, common shareholders benefit by receiving higher
dividends and/or an increase to the dividend reserve. However, the risk of
having preferred stock is that if short-term rates rise higher than
intermediate- and long-term rates, creating an inverted yield curve, common
shareholders may receive a lower rate of return than if their fund did not have
any preferred stock outstanding. This type of economic environment is unusual
and historically has been short term in nature. Investors should also be aware
that the issuance of preferred stock results in the leveraging of common stock
which increases the volatility of both the net asset value of the fund and the
market value of shares of common stock.
BECAUSE IT APPEARS UNLIKELY THAT INTEREST RATES WILL FALL IN THE SECOND HALF
OF 1995 AS MUCH AS THEY DID IN THE FIRST HALF OF THE YEAR, WE ARE TAKING A
LESS AGGRESSIVE POSITION IN THE FUND. We have purchased floating rate
municipal securities to help offset some of the price volatility created by
the fund's holdings of inverse floating rate securities. While we have
reduced net asset value volatility by purchasing floating rate securities, we
have also reduced the fund's income and some of the potential for net asset
value improvement generated by the inverse floating rate securities.
THE FUND'S ISSUANCE OF PREFERRED STOCK HAS BENEFITED COMMON SHAREHOLDERS OVER
THE LIFE OF THE FUND. During the past six months the preferred stock has
added slightly less income than in the past; however, it is still allowing us
to pay a higher dividend than if the fund did not have preferred stock
outstanding. This decrease in income was a result of short-term, tax-exempt
interest rates rising while the rates on the long-term bonds in the fund's
portfolio remained fixed. Typically, the money paid by preferred shareholders
to buy preferred stock is reinvested by the fund at long-term interest rates
that are higher than the short-term rates paid to preferred shareholders. In
the past, this has allowed the fund to earn higher income than the monthly
common stock dividend it paid out and to build up a
5
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MINNESOTA MUNICIPAL INCOME PORTFOLIO
dividend reserve. However, as short-term rates have risen, the additional
income provided by the preferred stock has been slightly less than the income
required to both sustain the current common stock dividend level and pay the
preferred stock dividends. For the six-month period ended July 31, on average
the fund earned $0.0882 per share per month, while it paid out $0.0937 per
share per month to common and preferred shareholders (on a common share
basis). As a result, we've had to draw from the fund's dividend reserve to
help maintain the common stock distributions. The fund's ability to
supplement the common stock dividend is a result of the dividend reserve we
built up during periods of lower short-term rates. The remaining dividend
reserve, which was $0.0605 per common share on July 31, will only allow us to
maintain the current common stock dividend for a limited time if the rates
paid on the preferred stock remain at current levels or rise. Thereafter, it
is likely that we would need to reduce the common stock dividend. The average
rate paid on the preferred stock was 3.70% on July 31.
MINNESOTA MUNICIPAL INCOME PORTFOLIO
PORTFOLIO COMPOSITION
JULY 31, 1995
Education Revenue 6%
Multiple Utility Revenue 3%
Nursing Home Revenue 3%
Other Assets 3%
Sales Tax 2%
Leasing Revenue 2%
Electric Revenue 7%
Housing Revenue 16%
Health Service/HMO 4%
Inverse Floaters 5%
Inverse Interest-Only 2%
Floaters 2%
Hospital Revenue 15%
General Obligations 30%
INVESTMENT CATEGORIES REFLECT PERCENTAGE OF TOTAL ASSETS.
BECAUSE OF LAST YEAR'S RISE IN INTEREST RATES, WE REALIZED SOME LOSSES IN THE
PORTFOLIO (SEE CHART ON PAGE 4). As interest rates rose and the price of
fixed income securities fell, we sold some of the investments in the fund at
a loss in order to
6
<PAGE>
MINNESOTA MUNICIPAL INCOME PORTFOLIO
reposition the fund. These losses may be used to offset capital gains
the fund may realize in the future. This would allow the fund to avoid paying
capital gains distributions which are taxable. We are replacing the securities
we sold at a loss with higher-yielding investments that should, over time,
increase the earning power of the portfolio.
ALTHOUGH A LARGE PORTION OF THE PORTFOLIO IS INVESTED IN MINNESOTA MUNICIPAL
REVENUE BONDS THAT ARE BACKED SOLELY BY REVENUE GENERATED BY THE PROJECT, WE
BELIEVE WE HAVE REDUCED THE CREDIT RISK ASSOCIATED WITH THESE INVESTMENTS.
Our strategy of managing credit risk, or the risk of failure of the issuer to
make payment, involves extensive due diligence and credit analysis prior to
purchasing these bonds, as well as while they are held in the portfolio. This
research, which goes beyond the ratings issued by Moody's or S&P, helps
ensure that we maintain an investment-grade portfolio. For example, if a bond
is rated A- by Moody's or S&P and, after completing our research, we believe
it should only be rated BBB+, we may sell the bond in anticipation of the
bond's rating being downgraded. If a bond's rating is downgraded, not only
does it have a higher risk of default, but the value of the bond will also
fall due to its lower rating. While we have not experienced payment defaults
so far, this fund does have credit risk and the failure of an issuer to make
payments could result in a decrease in income and/or net asset value.
MINNESOTA CONTINUES TO ENJOY A DIVERSE ECONOMY WHICH MINIMIZES THE CONCERN OF
GEOGRAPHIC DIVERSIFICATION THAT MANY OTHER STATE-SPECIFIC FUNDS EXPERIENCE. No
single company or industry dominates in Minnesota -- seven industries each
account for 8% to 20% of the state's economy. As a result, Minnesota usually has
less extreme cycles of expansion and recession than most other states and even
the United States as a whole. The state's unemployment rate is
7
<PAGE>
MINNESOTA MUNICIPAL INCOME PORTFOLIO
typically one or two percentage points less than the national average. In
addition, the credit quality of many Minnesota school district issues has
been raised by a program that allows school districts to apply for state
guarantees. This enables the school districts to receive the state's AA
credit rating and reduces the school districts' cost of borrowing.
GOING FORWARD, WE BELIEVE THE CURRENT MARKET ENVIRONMENT SHOULD CONTINUE TO
PROVIDE MUNICIPAL BOND INVESTORS WITH ATTRACTIVE AFTER-TAX RETURNS. For example,
a 6% tax-exempt yield for someone in the 41.4% combined federal and state of
Minnesota tax bracket represents the equivalent of a 10.24% taxable return.+
This compares favorably to the current inflation rate of 3%.
Thank you for your investment in Minnesota Municipal Income Portfolio. We
consider it a privilege to manage your money and remain committed to serving
your investment needs.
Sincerely,
/s/ RONALD REUSS
- ----------------------
Ronald Reuss
Co-manager
/s/ DOUGLAS WHITE
- ----------------------
Douglas White
Co-manager
+ THIS YIELD IS USED FOR ILLUSTRATIVE PURPOSES ONLY AND IS NOT INDICATIVE OF AN
INVESTMENT IN THE FUND.
8
<PAGE>
TAX REFORM PROPOSALS
Over the past several years, a number of tax changes have been proposed by
politicians responding to public dissatisfaction. Among these tax reform
proposals are a flat tax, a sales tax, a consumed income tax and a progressive
income tax. Although there is no certainty when or even if these changes would
be enacted, they do have important implications for investors and may have
already had some impact on the tax-exempt municipal bond market.
Among the different tax reforms, the flat tax proposal has generated more
interest and publicity than any of the other proposals. The concept behind the
best-known flat tax proposal by Representative Dick Armey is that a flat tax
recognizes all taxpayers as equal by taxing all wage or salary income at a flat
rate. The flat tax would also do away with current deductions, exemptions and
credits such as interest on home mortgage loans, charitable contributions, state
and local taxes, and medical expenses. Also under this proposal, Social Security
benefits and income from savings and investments would be granted a tax-exempt
status.
While there are many varying flat tax initiatives, they all share some common
elements of which municipal bond investors should be aware. All flat tax
proposals would only tax income from wages and salary and would exempt from
tax the interest, dividends and capital gains earned on investments and real
estate. Proponents of a flat tax argue that this would encourage more people
to save money and would be good for investments. However, opponents of a flat
tax say it would hurt tax-exempt municipal bond investors because municipal
bonds currently have interest yields that are lower than taxable interest
yields since the interest paid on municipal bonds is free from federal income
tax. If all interest income were free of taxes, the advantage of investing in
municipal securities would be eliminated and their prices would likely fall.
Some analysts believe the possibility of a flat tax has already turned away
some municipal bond investors creating a scare in the municipal bond market.
In spite of tax reform's increasing popularity, many taxpayers -- including
special interest groups, homeowners and municipal bond investors and issuers,
among others -- have too much to lose not to put up a fight. In addition, it
would take several years for any type of tax reform to be enacted and
implemented and many key members of Congress have already said that any major
reform would need to include a provision that would offset the negative impact
on existing municipal bond investors. Until there is evidence that a major tax
reform is closer to reality, we will maintain our current strategy of managing
the fund; however, we will be closely monitoring these tax change proposals. We
encourage investors to keep an eye on the tax reform debate as well, but
strongly suggest they continue to take advantage of the tax-free income they can
earn by investing in municipal bonds.
9
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS (UNAUDITED)
STATEMENT OF ASSETS AND LIABILITIES
JULY 31, 1995
<TABLE>
<S> <C>
ASSETS:
Investments in securities at market value* (note 2) .... $ 83,722,141
Cash in bank on demand deposit ........................... 61,923
Accrued interest receivable .............................. 1,881,686
----------------
Total assets ......................................... 85,665,750
----------------
LIABILITIES:
Preferred stock dividends payable (note 3) ............... 18,852
Accrued investment management fee ........................ 28,407
Accrued remarketing agent fee ............................ 13,821
Accrued administrative fee ............................... 12,175
Other accrued expenses ................................... 31,610
----------------
Total liabilities .................................... 104,865
----------------
Net assets applicable to outstanding capital stock ....... $ 85,560,885
----------------
----------------
REPRESENTED BY:
Preferred stock - authorized 1 million shares of $25,000
liquidation preference per share; outstanding, 1,244
shares ................................................. 31,100,000
----------------
Common stock - authorized 200 million shares of $0.01 par
value; outstanding, 4,151,343 shares ................... 41,513
Additional paid-in capital ............................... 58,063,710
Undistributed net investment income ...................... 251,345
Accumulated net realized loss on investments ............. (3,302,511)
Unrealized depreciation of investments ................... (593,172)
----------------
Total - representing net assets applicable to
outstanding common stock ........................... 54,460,885
----------------
Total net assets ................................... $ 85,560,885
----------------
----------------
Net asset value per share of outstanding common stock (net
assets divided by 4,151,343 shares of common stock
outstanding) ........................................... $ 13.12
----------------
----------------
* Investments in securities at identified cost ........... $ 84,315,313
----------------
----------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
6
<PAGE>
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FINANCIAL STATEMENTS (UNAUDITED)
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JULY 31, 1995
<TABLE>
<S> <C>
INCOME:
Interest ............................................... $ 2,546,769
----------------
EXPENSES (NOTE 5):
Investment management fee ................................ 147,665
Administrative fee ....................................... 63,285
Remarketing agent fee .................................... 39,091
Custodian, accounting and transfer agent fees ............ 41,382
Reports to shareholders .................................. 10,555
Directors' fees .......................................... 5,647
Audit and legal fees ..................................... 24,696
Other expenses ........................................... 17,449
----------------
Total expenses ....................................... 349,770
----------------
Net investment income ................................ 2,196,999
----------------
NET REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
Net realized loss on investments (note 4) ................ (246,510)
Net change in unrealized appreciation or depreciation of
investments ............................................ 5,209,305
----------------
Net gain on investments ................................ 4,962,795
----------------
Net increase in net assets resulting from
operations ....................................... $ 7,159,794
----------------
----------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
7
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six Months Ended
7/31/95 Year Ended
(Unaudited) 1/31/95
---------------- ----------------
<S> <C> <C>
OPERATIONS:
Net investment income .................................. $ 2,196,999 4,550,139
Net realized loss on investments ......................... (246,510) (2,864,350)
Net change in unrealized appreciation or depreciation of
investments ............................................ 5,209,305 (8,556,148)
---------------- ----------------
Net increase (decrease) in net assets resulting from
operations ........................................... 7,159,794 (6,870,359)
---------------- ----------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income:
Common stock dividends ................................. (1,729,162) (3,463,696)
Preferred stock dividends .............................. (605,119) (942,614)
---------------- ----------------
(2,334,281) (4,406,310)
---------------- ----------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from issuance of 19,576 common shares for the
dividend reinvestment plan (note 2) .................... -- 262,726
Payments for retirement of 4,900 and 10,000 common shares,
respectively (note 7) .................................. (59,321) (106,387)
---------------- ----------------
Increase (decrease) in net assets from capital share
transactions ......................................... (59,321) 156,339
---------------- ----------------
Total increase (decrease) in net assets .............. 4,766,192 (11,120,330)
Net assets at beginning of period .......................... 80,794,693 91,915,023
---------------- ----------------
Net assets at end of period .............................. $ 85,560,885 80,794,693
---------------- ----------------
---------------- ----------------
Undistributed net investment income ...................... $ 251,345 388,627
---------------- ----------------
---------------- ----------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(1) ORGANIZATION
Minnesota Municipal Income Portfolio (the fund) is registered
under the Investment Company Act of 1940 (as amended) as a non-
diversified, closed-end management investment company. Minnesota
Municipal Income Portfolio commenced operations on June 25,
1993, upon completion of its initial public offering of common
stock. The only transaction of Minnesota Municipal Income
Portfolio prior to June 25, 1993, was the sale to Piper Jaffray
Inc. of 6,667 shares of common stock for $100,005 on June 14,
1993. Shares of the fund are listed on the American Stock
Exchange and the Chicago Stock Exchange.
(2) SIGNIFICANT
ACCOUNTING
POLICIES
INVESTMENTS IN SECURITIES
The values of fixed income securities are determined using
pricing services or prices quoted by independent brokers. Open
financial futures contracts are valued at the last settlement
price. When market quotations are not readily available,
securities are valued at fair value according to methods
selected in good faith by the board of directors. Short-term
securities with maturities of 60 days or less are valued at
amortized cost which approximates market value.
Securities transactions are accounted for on the date the
securities are purchased or sold. Realized gains and losses are
calculated on the identified-cost basis. Interest income,
including amortization of bond discount and premium computed on
a level-yield basis, is accrued daily.
The fund concentrates its investments in Minnesota and,
therefore, may have more credit risks related to the economic
conditions of Minnesota than a portfolio with a broader
geographical diversification.
FUTURES TRANSACTIONS
In order to gain exposure to or protect against changes in the
market, the fund may buy and sell financial futures contracts
and related options. Risks of entering into futures contracts
and related options include the possibility there may be an
illiquid market and that a change in the value of the contract
or option may not correlate with changes in the value of the
underlying securities.
Upon entering into a futures contract, the fund is required to
deposit either cash or securities in an amount (initial margin)
equal to a certain percentage of the contract value. Subsequent
payments
9
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(variation margin) are made or received by the fund each day.
The variation margin payments are equal to the daily changes in
the contract value and are recorded as unrealized gains and
losses. The fund recognizes a realized gain or loss when the
contract is closed
or expires.
SECURITIES PURCHASED ON A WHEN-ISSUED BASIS
Delivery and payment for securities that have been purchased by
the fund on a forward-commitment or when-issued basis can take
place a month or more after the transaction date. During this
period, such securities do not earn interest, are subject to
market fluctuations and may increase or decrease in value prior
to their delivery. The fund maintains, in segregated accounts
with its custodian, assets with a market value equal to the
amount of its purchase commitments. The purchase of securities
on a when-issued or forward-commitment basis may increase the
volatility of the fund's NAV to the extent the fund makes such
purchases while remaining substantially fully invested. As of
July 31, 1995, Minnesota Municipal Income Portfolio had no
outstanding when-issued or forward committments.
FEDERAL TAXES
The fund intends to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to shareholders. Therefore,
no income tax provision is required. In addition, on a
calendar-year basis, the fund will distribute substantially all
of its taxable net investment income and realized gains, if any,
to avoid payment of any federal excise taxes.
Net investment income and net realized gains (losses) may differ
for financial statement and tax purposes primarily because of
market discount amortization and the deferral of "wash sale"
losses for tax purposes. The character of distributions made
during the year from net investment income or net realized gains
may also differ from their ultimate characterization for federal
income tax purposes. In addition, due to the timing of dividend
distributions, the fiscal year in which amounts are distributed
may differ from the year that the income or realized gains
(losses) were recorded by the fund.
DISTRIBUTIONS TO SHAREHOLDERS
Distributions from net investment income will be made on a
monthly basis for common shareholders and a weekly basis for
10
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
preferred stock shareholders. Common stock distributions are
recorded as of the close of business on the ex-dividend date,
and preferred stock dividends are accrued daily. Realized
capital gains, if any, will be distributed on an annual basis.
Distributions are payable in cash or for common shareholders,
pursuant to the fund's dividend reinvestment plan, reinvested in
additional shares of the fund's common stock. Under the plan,
common shares will be purchased in the open market.
Prior to amendment of this plan, effective November 23, 1994,
the fund could issue new shares for reinvestment of
distributions under certain circumstances.
(3) REMARKETED
PREFERRED STOCK
Minnesota Municipal Income Portfolio has issued and, as of July
31, 1995, has outstanding 1,244 shares of remarketed preferred
stock (622 shares in class "M" and 622 shares in class "W")
("RP-Registered Trademark-") with a liquidation preference of
$25,000 per share. The dividend rate on the
RP-Registered Trademark- is adjusted every seven days (on
Mondays for class "M" and on Wednesdays for class "W") as
determined by the remarketing agent. On July 31, 1995, the
dividend rates were 3.65% and 3.74% for class "M" and "W",
respectively.
(4) INVESTMENT
SECURITY
TRANSACTIONS
Purchases of securities and proceeds from sales, other than
temporary investments in short-term securities, for the six
months ended July 31, 1995, were $5,251,156 and $5,426,370,
respectively.
(5) FEES AND
EXPENSES
The fund has entered into the following agreements with Piper
Capital Management Incorporated (the adviser and administrator):
The investment advisory agreement provides the adviser with a
monthly investment management fee calculated at the annualized
rate of 0.35% of the fund's average weekly net assets (computed
by subtracting liabilities, which exclude preferred stock, from
the value of the total assets of the fund). For its fee, the
adviser will provide investment advice and, in general, conduct
the management and investment activity of the fund.
The administration agreement provides the administrator with a
monthly fee in an amount equal to an annualized rate of 0.15% of
the fund's average weekly net assets (computed by subtracting
11
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
liabilities, which exclude preferred stock, from the value of
the total assets of the fund). For its fee, the administrator
will provide certain reporting, regulatory, and record-keeping
services for the fund.
The fund has entered into a remarketing agent agreement with
Merrill Lynch, Pierce, Fenner & Smith (the remarketing agent).
The remarketing agreement provides the remarketing agent with a
monthly fee in an amount equal to an annualized rate of 0.25% of
the fund's average amount of RP-Registered Trademark-
outstanding. For its fee, the remarketing agent will remarket
shares of RP-Registered Trademark- tendered to it, on behalf of
shareholders thereof, and will determine the applicable dividend
rate for each seven-day dividend period.
In addition to the advisory fee, the administrative fee and the
remarketing agent fee, the fund is responsible for paying most
other operating expenses including outside directors' fees and
expenses, custodian fees, registration fees, printing and
shareholder reports, transfer agent fees and expenses, legal,
auditing and accounting services, insurance, interest and other
miscellaneous expenses.
(6) CAPITAL LOSS
CARRYOVER
For federal income tax purposes, Minnesota Municipal Income
Portfolio had a capital loss carryover of $3,056,001 as of
January 31, 1995, which if not offset by subsequent capital
gains, will expire in the years 2003 and 2004. It is unlikely
the board of directors will authorize a distribution of any net
realized capital gains until the available capital loss
carryover has been offset or expires.
(7) RETIREMENT OF
FUND SHARES
The fund's board of directors has approved a plan to repurchase
shares of the fund in the open market and retire those shares.
Repurchases may only be made when the previous day's closing
market price was trading at a discount from net asset value.
Daily repurchases are limited to 25% of the previous four weeks
average daily trading volume on the American Stock Exchange.
Under the current plan, cumulative repurchases in the fund
cannot exceed 3% of the total shares originally issued. The
board of directors will review the plan every six months and may
change the amount which may be repurchased. The plan was last
reviewed and reapproved by the board of directors on August 17,
1995. Pursuant to the plan, the fund has cummulatively
repurchased and retired 14,900 shares as of July 31, 1995, which
represents 0.4% of the shares originally issued.
12
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(8) FINANCIAL
HIGHLIGHTS
Per-share data for a share of common stock outstanding
throughout each period and selected information for each period
are as follows:
MINNESOTA MUNICIPAL INCOME PORTFOLIO
<TABLE>
<CAPTION>
Six Months
Ended Year Ended Period from
7/31/95 January 31, 6/25/93* to
(Unaudited) 1995 1/31/94
----------- ----------- -----------
<S> <C> <C> <C>
Net asset value, beginning of period ........... $ 11.96 14.67 14.13
----------- ----------- -----------
Operations:
Net investment income .......................... 0.53 1.09 0.55
Net realized and unrealized gains (losses) on
investments 1.19 (2.74) 0.63
----------- ----------- -----------
Total from operations ........................ 1.72 (1.65) 1.18
----------- ----------- -----------
Distributions to shareholders from net investment
income
Paid to common shareholders .................. (0.42) (0.83) (0.42)
Paid to preferred shareholders ............... (0.14) (0.23) (0.08)
----------- ----------- -----------
Total distributions to shareholders ........ (0.56) (1.06) (0.50)
----------- ----------- -----------
Offering costs and underwriting discounts
associated with the remarketed preferred
stock .......................................... -- -- (0.14)
----------- ----------- -----------
Net asset value per share of common stock, end of
period ....................................... $ 13.12 11.96 14.67
----------- ----------- -----------
----------- ----------- -----------
Market value per share of common stock, end of
period . $ 12.13 11.88 15.50
----------- ----------- -----------
----------- ----------- -----------
Total investment return, common stock, market
value** ........................................ 5.57% (18.11)% 6.18%
Total investment return, common stock, net asset
value+ ......................................... 13.25% (12.69)% 6.86%
Net assets at end of period (in millions) ...... $ 86 81 92
Ratio of expenses to average weekly net assets ... 0.83%++ 0.79% 0.69%++
Ratio of net investment income to average weekly
net assets ..................................... 5.21%++ 5.54% 4.66%++
Portfolio turnover rate (excluding short-term
securities) .................................... 6% 49% 55%
Remarketed preferred stock, liquidation preference
of $25,000 for each of 1,244 shares outstanding
(in millions) ................................ $ 31 31 31
Asset coverage for remarketed preferred
stock+++ ....................................... 275% 260% 296%
<FN>
* COMMENCEMENT OF OPERATIONS.
** TOTAL INVESTMENT RETURN, MARKET VALUE, IS BASED ON THE CHANGE IN MARKET
PRICE OF A COMMON SHARE DURING THE PERIOD AND ASSUMES REINVESTMENT OF
DISTRIBUTIONS AT ACTUAL PRICES PURSUANT TO THE FUND'S DIVIDEND REINVESTMENT
PLAN. THE PERCENTAGE FOR THE PERIOD FROM 6/25/93 TO 1/31/94 HAS NOT BEEN
ANNUALIZED.
+ TOTAL INVESTMENT RETURN, NET ASSET VALUE, IS BASED ON THE CHANGE IN NET
ASSET VALUE OF A COMMON SHARE DURING THE PERIOD AND ASSUMES REINVESTMENT OF
DISTRIBUTIONS AT NET ASSET VALUE. THE PERCENTAGE FOR THE PERIOD FROM
6/25/93 TO 1/31/94 HAS NOT BEEN ANNUALIZED.
++ ADJUSTED TO AN ANNUAL BASIS.
+++ REPRESENTS TOTAL NET ASSETS DIVIDED BY REMARKETED PREFERRED STOCK.
</TABLE>
13
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(9) QUARTERLY DATA
MINNESOTA MUNICIPAL INCOME PORTFOLIO
DOLLAR AMOUNTS
<TABLE>
<CAPTION>
Net Increase
in Net
Net Realized Assets Distributions
Net and Unrealized Resulting from Net
Investment Investment Gains on from Investment
Income Income Investments Operations Income
----------- ----------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
4/30/95 $ 1,281,248 1,121,440 3,337,793 4,459,233 (1,156,974)
7/31/95 1,265,521 1,075,559 1,625,002 2,700,561 (1,177,307)
----------- ----------- -------------- ------------ ------------
$ 2,546,769 2,196,999 4,962,795 7,159,794 (2,334,281)
----------- ----------- -------------- ------------ ------------
----------- ----------- -------------- ------------ ------------
</TABLE>
PER-SHARE AMOUNTS
<TABLE>
<CAPTION>
Net Increase
Net Realized in Net Assets Distributions
Net and Unrealized Resulting from Net Quarter-End
Investment Gains from Investment Net Asset
Income on Investments Operations Income Value
---------- -------------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
4/30/95 $ 0.27 0.80 1.07 (0.28) 12.75
7/31/95 0.26 0.39 0.65 (0.28) 13.12
--- --- --- -----
$ 0.53 1.19 1.72 (0.56)
--- --- --- -----
--- --- --- -----
</TABLE>
14
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES (UNAUDITED)
MINNESOTA MUNICIPAL INCOME PORTFOLIO
JULY 31, 1995
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
- --------------------------------------------------------- --------- ----------
<S> <C> <C>
(PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS)
MUNICIPAL LONG-TERM SECURITIES (97.7%):
MUNICIPAL BONDS (88.4%)
EDUCATION REVENUE (5.6%):
Higher Education Facility - St. Mary's College,
6.10%-6.15%, 10/1/16-10/1/23 ....................... $ 1,400,000 1,352,239
Higher Education Facility - St. Thomas University,
5.50%-5.60%, 9/1/08-9/1/14 ........................... 430,000 411,875
State Higher Education, 5.75%, 11/1/12 ................ 2,000,000 1,988,980
State Higher Education Series 3-W, 6.20%-6.38%,
3/1/14-3/1/20 ........................................ 1,050,000 1,025,923
----------
4,779,017
----------
ELECTRIC REVENUE (7.1%):
Northern Municipal Power Revenue, 5.50%, 1/1/18 ....... 400,000 380,224
Southern Municipal Power Agency Supply, 4.75%-5.75%,
1/1/12-1/1/18 ........................................ 5,205,000 4,685,892
Southern Municipal Power Agency Supply, 5.75%,
7/1/16 ............................................... 1,000,000 990,000
----------
6,056,116
----------
GENERAL OBLIGATIONS (29.1%):
Albany Independent School District, 6.00%, 2/1/16 ..... 2,000,000 2,021,200
Anoka County, 6.10%, 6/1/13 ........................... 500,000 500,680
Chaska Independent School District,, 6.00%, 2/1/15 .... 2,200,000 2,220,460
Elk River Independent School District, 5.20%,
2/1/17 ............................................... 2,500,000 2,299,750
Milaca Independant School District, 5.45%, 2/1/16 ..... 1,735,000 1,640,876
Minneapolis General Obligation, 5.20%, 3/1/13 ......... 1,400,000 1,327,298
State General Obligation, 5.40%, 8/1/12 ............... 7,000,000 6,847,750
Richfield School District, 5.35%, 2/1/15 .............. 4,000,000 3,786,960
Rosemont General Obligation, 5.75%, 4/1/13 ............ 1,000,000 992,240
Roseville Independent School District, 5.85%-6.00%,
2/1/19-2/1/24 1,500,000 1,509,195
Saint Paul Port Authority, 5.13%, 3/1/24 .............. 2,000,000 1,759,580
----------
24,905,989
----------
HEALTH SERVICE/HMO'S (3.6%):
Brainerd Health Care Facility Revenue, 6.00%,
2/15/12 .............................................. 1,060,000 1,068,374
Duluth Clinic Health Care Facilities, 6.30%,
11/1/22 .............................................. 1,000,000 1,018,810
Duluth Economic Development Authority Health Care
Facility, 6.00%, 2/15/12 ............................. 1,000,000 1,005,730
----------
3,092,914
----------
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
15
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES (UNAUDITED)
MINNESOTA MUNICIPAL INCOME PORTFOLIO
(CONTINUED)
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
- --------------------------------------------------------- --------- ----------
<S> <C> <C>
HOSPITAL REVENUE (15.2%):
Duluth Health Facility - Benedictine Health Systems,
6.00%, 2/15/12 ..................................... $ 1,800,000 1,814,220
Fergus Falls Health Care - Lake Region Hospital, 6.50%,
9/1/18 ............................................... 1,000,000 967,480
Minneapolis Health Care Facility Revenue, 5.25%,
11/15/13-11/15/19 .................................... 2,250,000 2,039,755
Red Wing Health Care Facility - River Region, 6.50%,
9/1/22 ............................................... 1,000,000 981,200
Robbinsdale Hospital Revenue, 5.55%, 5/15/19 .......... 1,500,000 1,407,690
St. Paul Housing Redevelopment Authority - Healtheast
Project, 6.63%, 11/1/17 .............................. 6,000,000 5,819,460
----------
13,029,805
----------
HOUSING REVENUE (15.9%):
Brooklyn Center, Ponds Family Housing Project, 5.90%,
1/1/20 ............................................... 1,050,000 983,063
Burnsville, Summit Park Apartments, 5.75%, 7/1/11 ..... 1,000,000 989,670
Coon Rapids Multi-Family Development-Woodland Apts.,
5.63%, 12/1/09 ....................................... 3,895,000 3,851,259
Minneapolis and Saint Paul Minnesota Housing &
Redevelopment Authority Health Care Systems, 4.75%,
11/15/18 ............................................. 1,500,000 1,256,340
Minnesota State Finance Housing Agency, 5.95%,
1/1/17 ............................................... 3,495,000 3,420,312
Minnesota State Housing Finance Agency, 5.70%-6.10%,
8/1/07-8/1/22 ........................................ 2,370,000 2,347,162
Minnesota State Housing Finance Authority - Single
Family Series F, 6.30%, 7/1/25 ....................... 750,000 755,070
----------
13,602,876
----------
IDR - MISCELLANEOUS PROJECTS (0.3%):
Duluth Seaway Port Authority, 5.75%, 12/1/16 .......... 300,000(e) 285,475
----------
LEASING REVENUE (2.4%):
Benton County Jail Facility, 5.70%, 2/1/13-2/1/16 ..... 900,000 878,666
Waconia Housing Redevelopment Authority- Public
Project, 5.70%-5.75%, 1/1/10-1/1/15 .................. 1,240,000 1,171,497
----------
2,050,163
----------
MULTIPLE UTILITY REVENUE (3.4%):
Owatonna Public Utility Revenue, 5.45%, 1/1/16 ........ 3,100,000 2,932,011
----------
NURSING HOME REVENUE (3.4%):
Red Wing Elderly Housing - River Region, 6.50%,
9/1/22 ............................................... 1,500,000 1,471,800
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
16
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES (UNAUDITED)
MINNESOTA MUNICIPAL INCOME PORTFOLIO
(CONTINUED)
<TABLE>
<CAPTION>
Principal Market
Name of Issuer Amount Value (a)
- --------------------------------------------------------- --------- ----------
<S> <C> <C>
Waconia Housing Redevelopment Authority Revenue -
Evangelical Luthern, 6.00%, 6/1/14 ................. $ 1,500,000 1,466,775
----------
2,938,575
----------
SALES TAX REVENUE (2.4%):
Minneapolis Convention Center Facilities, 5.40%,
4/1/12 ............................................... 2,000,000 1,956,840
----------
Total Municipal Bonds
(cost: $76,736,335) ................................. 75,629,781
----------
MUNICIPAL DERIVATIVE SECURITIES (9.3%)(E):
Breckenridge Health Care Series J-2, inverse floater,
6.65%, 11/15/13 ...................................... 1,525,000(c) 1,205,162
Duluth Health Care Series E-2, inverse floater, 8.69%,
2/15/12 .............................................. 925,000(c) 950,678
Minneapolis Municipal Trust 1993-A, Floating Rate Trust
Certificates, 4.10%, 3/1/13 .......................... 1,200,000(d) 1,200,000
Minneapolis General Obligation Residual Trust 144-A
Series A-5, inverse interest-only, 15.95%, 3/1/13 .... --(b) 1,247,455
Osseo Independent School District No. 279, inverse
floater, 7.67%, 2/1/13 ............................... 740,000(c) 685,469
Osseo Independent School District No. 279, inverse
floater, 7.68%, 2/1/14 ............................... 775,000(c) 710,164
Richfield, Minnesota Independent School District,
Floating Rate Trust Certificates, 3.95%, 2/1/12 ...... 500,000(d) 500,000
Rochester Health Care, inverse floater, 8.41%,
11/15/10 ............................................. 740,000(c) 800,576
Single-family Housing Finance Agency, inverse
interest-only, 0.0%, 2/1/15 .......................... --(b) 642,856
----------
Total Municipal Derivative Securities
(cost: $7,428,978) .................................. 7,942,360
----------
Total Municipal Long-Term Securities
(cost: $84,165,313) ................................. 83,572,141
----------
MUNICIPAL SHORT-TERM SECURITIES (0.2%):
Mankato Government Sales Tax Revenue, 2.32%, 2/1/18
(cost: $150,000) ..................................... 150,000(d) 150,000
----------
Total Investments in Securities (97.9%)
(cost: $84,315,313) (f) ........................... $ 83,722,141
----------
----------
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
17
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES (UNAUDITED)
NOTES TO INVESTMENTS IN SECURITIES:
<TABLE>
<S> <C>
(A) SECURITIES ARE VALUED IN ACCORDANCE WITH PROCEDURES DESCRIBED IN NOTE 2 TO THE
FINANCIAL STATEMENTS.
(B) INVERSE INTEREST-ONLY--REPRESENTS SECURITIES THAT ENTITLE HOLDERS TO RECEIVE ONLY
INTEREST PAYMENTS. INTEREST IS PAID AT A RATE THAT INCREASES (DECREASES) WITH A
DECLINE (INCREASE) IN THE MARKET RATE PAID ON A RELATED, FLOATING RATE SECURITY.
INTEREST RATES DISCLOSED REPRESENT CURRENT YIELDS BASED UPON THE COST BASIS AND
ESTIMATED TIMING AND AMOUNT OF FUTURE CASH FLOWS.
(C) INVERSE FLOATER--REPRESENTS SECURITIES THAT PAY INTEREST AT RATES THAT INCREASE
(DECREASE) IN THE SAME MAGNITUDE AS, OR IN A MULTIPLE OF, A DECLINE (INCREASE) IN
THE MARKET RATE PAID ON A RELATED, FLOATING RATE SECURITY. INTEREST RATES DISCLOSED
ARE IN EFFECT ON JULY 31, 1995.
(D) VARIABLE RATE NOTE. INTEREST RATE VARIES TO REFLECT CURRENT MARKET CONDITIONS; RATE
SHOWN IS THE EFFECTIVE RATE ON JULY 31, 1995.
(E) SECURITIES SOLD WITHIN TERMS OF A PRIVATE PLACEMENT MEMORANDUM AND MAY BE SOLD ONLY
TO DEALERS IN THAT PROGRAM OR OTHER ACCREDITED INVESTORS.
(F) ALSO APPROXIMATES COST FOR FEDERAL INCOME TAX PURPOSES. THE AGGREGATE GROSS
UNREALIZED APPRECIATION AND DEPRECIATION OF INVESTMENTS IN SECURITIES BASED ON THIS
COST WERE AS FOLLOWS:
</TABLE>
<TABLE>
<S> <C>
GROSS UNREALIZED APPRECIATION .... $ 1,342,095
GROSS UNREALIZED DEPRECIATION ...... (1,935,267)
----------
NET UNREALIZED DEPRECIATION .... $ (593,172)
----------
----------
</TABLE>
18
<PAGE>
- --------------------------------------------------------------------------------
SHAREHOLDER UPDATE
ANNUAL MEETING RESULTS
An annual meeting of the fund's shareholders was held on August 17, 1995. Each
matter voted upon at the meeting, as well as the number of votes cast for,
against or withheld, and the number of abstentions with respect to such matter,
are set forth below.
1. The fund's preferred shareholders elected the following two directors:
<TABLE>
<CAPTION>
Shares Voted Shares Withholding
"For" Authority to Vote
--------------- -----------------------
<S> <C> <C>
David T. Bennett 668 0
William H. Ellis 668 0
</TABLE>
2. The fund's preferred and common shareholders, voting as a class, elected
the following four directors:
<TABLE>
<CAPTION>
Shares Voted Shares Withholding
"For" Authority to Vote
------------ ------------------
<S> <C> <C>
Jaye F. Dyer 3,847,104 84,784
Karol D. Emmerich 3,847,104 84,784
Luella G. Goldberg 3,847,104 84,784
George Latimer 3,847,102 84,786
</TABLE>
3. The fund's preferred and common shareholders, voting as a class, ratified
the selection by a majority of the independent members of the fund's Board of
Directors of KPMG Peat Marwick LLP as the independent public accountants for the
fund for the fiscal year ending January 31, 1996. The following votes were cast
regarding this matter:
<TABLE>
<CAPTION>
Shares Voted Shares Voted
"For" "Against" Abstentions
- ------------ ------------- -----------
<S> <C> <C>
3,852,681 28,058 51,149
</TABLE>
19
<PAGE>
- --------------------------------------------------------------------------------
SHAREHOLDER UPDATE
SHARE REPURCHASE PROGRAM
Your fund's board of directors has reapproved the share repurchase program,
which enables the fund to 'buy back' shares of its common stock in the open
market. Repurchases may only be made when the previous day's closing market
price per share was at a discount from net asset value. Repurchases cannot
exceed 3% of the fund's originally issued shares.
WHAT EFFECT WILL THIS PROGRAM HAVE ON SHAREHOLDERS?
- - We do not expect any adverse impact on the adviser's ability to manage the
fund.
- - Because repurchases will be at a price below net asset value, remaining shares
outstanding may experience a slight increase in net asset value.
- - Although the effect of share repurchases on market price is less certain, the
board of directors believes the program may have a favorable effect on the
market price of fund shares.
- - We do not anticipate any material increase in the fund's expense ratio.
WHEN WILL SHARES BE REPURCHASED?
Share repurchases may be made from time to time and may be discontinued at any
time. Share repurchases are not mandatory when fund shares are trading at a
discount from net asset value; all repurchases will be at the discretion of the
fund's investment adviser. The board of directors will consider whether to
continue the share repurchase program on at least a semiannual basis and will
notify shareholders of its determination in the next semiannual or annual
report.
HOW WILL SHARES BE REPURCHASED?
We expect to finance the repurchase of shares by liquidating portfolio
securities or using current cash balances. We do not anticipate borrowing in
order to finance share repurchases.
EFFECTIVE DURATION
Effective duration estimates the interest rate risk of a security, in other
words how much the value of the security is expected to change with a given
change in interest rates. The longer a security's effective duration, the more
sensitive its price is to changes in interest rates. For example, if interest
rates were to increase by 1%, the market value of a bond with an effective
duration of five years would decrease by about 5%, with all other factors being
constant.
It is important to understand that, while a valuable measure, effective duration
is based upon certain assumptions and has several limitations. It is more
effective as a measure of interest rate risk when interest rate changes are
small, rapid and occur equally across all the different points of the yield
curve. In addition, effective duration is difficult to calculate precisely
especially in the case of a bond that is callable prior to maturity.
20
<PAGE>
- --------------------------------------------------------------------------------
DIRECTORS AND OFFICERS
DIRECTORS David T. Bennett, CHAIRMAN, HIGHLAND HOMES, INC., USL
PRODUCTS INC., KIEFER BUILT, INC., OF COUNSEL, GRAY,
PLANT, MOOTY, MOOTY & BENNETT, P.A.
Jaye F. Dyer, PRESIDENT, DYER MANAGEMENT COMPANY
William H. Ellis, PRESIDENT, PIPER JAFFRAY COMPANIES INC.,
PIPER CAPITAL MANAGEMENT INCORPORATED
Karol D. Emmerich, PRESIDENT, THE PARACLETE GROUP
Luella G. Goldberg, DIRECTOR, TCF FINANCIAL, RELIASTAR
FINANCIAL CORP., HORMEL FOODS CORP.
George Latimer, DIRECTOR, SPECIAL ACTIONS OFFICE, OFFICE
OF THE SECRETARY, DEPARTMENT OF HOUSING AND URBAN
DEVELOPMENT
OFFICERS William H. Ellis, CHAIRMAN OF THE BOARD
Douglas J. White, PRESIDENT
Ronald R. Reuss, EXECUTIVE VICE PRESIDENT
Robert H. Nelson, VICE PRESIDENT
Molly J. Destro, VICE PRESIDENT
David E. Rosedahl, SECRETARY
Charles N. Hayssen, TREASURER
INVESTMENT ADVISER Piper Capital Management Incorporated
222 SOUTH NINTH STREET, MINNEAPOLIS, MN 55402
CUSTODIAN AND Investors Fiduciary Trust Company
TRANSFER AGENT 127 WEST 10TH STREET, KANSAS CITY, MO 64105-1716
LEGAL COUNSEL Dorsey & Whitney P.L.L.P.
220 SOUTH SIXTH STREET, MINNEAPOLIS, MN 55402
21
<PAGE>
=============
PIPER CAPITAL ---------------
MANAGEMENT Bulk Rate
============= U.S. Postage
PAID
Permit No. 3008
PIPER CAPITAL MANAGEMENT INCORPORATED Mpls., MN
222 SOUTH NINTH STREET ---------------
MINNEAPOLIS, MN 55402-3804
PIPER-JAFFRAY INC., FUND SPONSOR AND NASD MEMBER.
THIS DOCUMENT IS PRINTED ON PAPER MADE FROM
[LOGO] 100% TOTAL RECOVERED FIBER, INCLUDING 15% POST-CONSUMER WASTE.
STAPLES
